Understanding Home Equity Products Interactive Training WORKSHEETS

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					Understanding Home Equity Products
Interactive Training


                                 WORKSHEETS
You can use the three worksheets in this section to help in the loan application
process. They will help you qualify your customer and select a Home Equity
product. You can go through these worksheets manually with your customer.
   o Calculating Potential Equity
   o Calculating Cost Benefits
   o Comparing Mortgage Options for Savings

Calculation Terminology
Important terms used on the worksheets in this section include the following.

Potential Equity and Actual Equity - determines the amount available for
borrowing. Potential equity is based on the initial estimate of the current market
value. The underwriter calculates the actual equity after the appraisal is
completed.

LTV and CLTV Ratios - determines the amount a customer can borrow.
The LTV (loan to value) ratio is the percentage of the property value allowed for
borrowing on a first mortgage. The CLTV (combined loan to value ratio) is a
combination of the first and all junior mortgages against the appraised or
purchased value of the property. The CLTV ratio is calculated by dividing the total
of all liens (i.e. the first mortgage and all recorded subordinate financing) by the
lower of appraised value or the purchase price (if purchased within the last 12
months) at the time the loan is closed. The Combined Loan to Value (CLTV)
maximum is based on the applicant’s current credit score, debt to income and
total liens on the property. You can get the maximum CLTV percentage permitted
from the product guidelines.

Blended (or Weighted Average) Rate - shows the potential cost benefits
of combining a first and second mortgage. The blended rate, or weighted
average rate, is the overall cost of financing a property, expressed as an interest
rate. It includes the interest rate on the mortgage or mortgages on the property,
as well as the cost of any supporting products, such as mortgage insurance. You
can calculate the blended rate by first multiplying the interest rate of each
mortgage or loan product (PMI) by its remaining balance, and then total that
number. Next, add up the total of the mortgages on the property. Finally, divide
the first total, which is the interest and other costs, by the second total, which is
the indebtedness on the property. That quotient will be the blended rate.




11/25/03                                                              Page 1 of 6
CALCULATING POTENTIAL EQUITY
This calculation worksheet is used to establish how much potential equity a
customer may have on the property. Potential equity is based on the initial
estimate of the current market value. The underwriter will calculate the actual
equity after the appraisal is completed.

Items to Consider
o What is the property type
   (Single Family Residence, Co-op, Condo, Manufactured Home)?
o Is it a Primary Residence or Secondary Home?
o Does the applicant have an existing mortgage?
o Is the customer applying for the No Income Verification program?

If the customer would like more than the CLTV stated, you may be able to
calculate at a higher CLTV provided that the customer meets the qualifications.


Calculating Potential Equity
Use this worksheet to establish how much potential equity a customer may have
on the property. Enter the information requested on each line that says “Enter”
and then calculate the other items (the formulas refer to item line numbers).


1                          Enter estimated market value

2                    Enter maximum allowable CLTV %

3                         Amount available for financing
                                              ( = 1 * 2)

4                      Enter the first mortgage balance

5                              Potential equity available
                                               ( = 3 - 4)


Calculating Actual Equity
After the appraisal is complete, the Underwriter will determine the actual equity
that the customer has, which will always differ from the potential equity calculated
above. Actual equity is calculated using the following steps.

1) The first mortgage balance and the home equity line/loan amount are added
   together.
2) The sum from Step 1 is divided by the appraised value.
3) The result from step 2 is multiplied by the appraised value.



11/25/03                                                            Page 2 of 6
CALCULATING COST BENEFITS
This worksheet helps to show the cost benefits of combining a first and second
mortgage using several different options. Enter the information requested on each
line that says “Enter” and then calculate the other items (the formulas refer to
item line numbers). Use your financial calculator to calculate the monthly payment
information. If your calculator computes a monthly interest rate, you can multiply
by twelve to get the annual interest rate.

Total Monthly Payments
 1             Enter computed first mortgage payment
                               (principle and interest)

 2            Enter computed second mortgage payment
                                (principle and interest)

 3                                  Total monthly payment
                                                ( = 1 + 2)

Blended Rate (first and second Option)
 4               Enter computed high LTV first payment

 5          Enter monthly mortgage insurance payment
                                           ( = 4 + 5)

 6                                  Total monthly payment

 7                                     Regular payment
                  (=first & second mortgage from line 3)

 8                           Difference high LTV with PMI
                                vs. first/second mortgage
                                                 ( = 6 - 7)

Blended Rate (high LTV first with PMI Option)
 9                   Enter first mortgage interest rate

10                    Enter mortgage insurance premium
                       (expressed as %, on annual basis)

11                                                      Sum
                                                 ( = 9 + 10)

12                   Blended rate (average of two rates)
                              ( = 11 / 2 (the number 2))




11/25/03                                                          Page 3 of 6
COMPARING MORTGAGE OPTIONS
Benefits of combining a first and second mortgage include increased buying
power, higher loan amounts, lower monthly payments, reduced settlement costs,
and tax deductions.

PMI Savings: For a down payment of less than 20%, Private Mortgage Insurance
(PMI) is required and PMI charges apply. PMI costs vary depending on the LTV,
required coverage level and payment method (i.e. monthly or annual). With a
second mortgage, PMI is not required and this can mean a significant savings.

Tax Benefits: Calculated annual savings on the worksheet excludes any tax
benefits your customer may receive. Generally, interest on home equity products is
tax deductible for aggregate loan and line amounts up to $100,000 regardless of
the use of the proceeds. Product amounts over $100,000 may not be tax
deductible unless the proceeds are used to buy, build or substantially improve the
home. Consult a tax advisor regarding a specific situation.




11/25/03                                                          Page 4 of 6
Comparing Mortgage Options for Savings
This worksheet compares a single mortgage option with the combined first and second
mortgage to show the savings with a second mortgage. Enter or calculate values as
appropriate. Enter data in the shaded green boxes. Blue boxes remain empty.

                                   First Mortgage   1st & 2nd Mortgages   1st & 2nd Mortgages
                                         Loan         in Access Period    in Repayment Period
                                                       (interest only,    (principle + interest,
                                                        first 9 years)       over 20 years)
1     Enter Purchase Price


2     Enter Down Payment


3     Enter Second Mortgage
      Amount
                                        ---
4     Principle Loan Amount


5     LTV
                                                             ---                   ---
6     CLTV
                                        ---
7     Enter First Mortgage
      Term (in months)


8     Enter Second Mortgage
      Term (in months)
                                        ---
9     Enter First Mortgage
      Interest Rate (as a
      decimal, ex. = .08)
10    Enter Second Mortgage
      Interest Rate (as a
                                        ---
      decimal, ex. = .06)
11    Enter First Mortgage
      Payment
      (use financial calculator)
12    Enter PMI
                                                             ---                   ---
13    Enter Second Mortgage
      Payment
                                        ---
      (use financial calculator)                    interest only         principle + interest
14    Total Monthly Payment


15    Monthly Savings
                                        ---
16    Yearly Savings
                                   ---
Note: Access period for Connecticut is 9 years & 10 months. Tennessee has a 10-
year repayment period.




11/25/03                                                                  Page 5 of 6
     Example: Comparing Mortgage Options for Savings
Green boxes are figures you must calculate and enter. Blue boxes remain empty.
                                  First Mortgage       1st & 2nd      1st & 2nd Mortgages
                                        Loan         Mortgages in     in Repayment Period
                                                    Access Period     (principle + interest,
                                                    (interest only,      over 20 years)
                                                     first 9 years)
1    Enter Purchase Price         $200,000          $200,000          $200,000
                                                   (1A)               (1A)
2    Enter Down Payment           $20,000           $20,000            $20,000
                                                   (2A)               (2A)
3    Enter Second Mortgage                         $20,000            $20,000
     Amount
                                        ---                           (3B)
4    Principle Loan Amount         $180,000         $160,000           $160,000
                                  (1A-2A)          (1B-2B-3B)         (4B)
5    LTV                           90%
                                  (4A/1A)                ---          ---
6    CLTV                                           90%                90%
                                       ---         (4A/1A)            (4A/1A)
7    Enter First Mortgage         360 months       360 months         360 months
     Term (in months)
                                                    (7A)               (7A)

8    Second Mortgage Term                          120 months         240 months
     (in months)
                                       ---
9    Enter First Mortgage         8%               8%                 8%
     Interest Rate (as a
                                                   (9A)               (9A)
     decimal)

10   Enter Second Mortgage                         4%                 6%
     Interest Rate (as a
                                       ---
     decimal)

11   Enter First Mortgage         $1320.78         $1174.03           $1174.03
     Payment
                                                                      (11B)
     (use financial calculator)
12   Enter PMI                    $120.00
     (use financial calculator)
                                                            ---          ---
13   Enter Second Mortgage                         $65.75       $143.92
     Payment                                  ((3Bx10B)/365)x30
                                  ---                           principle and
     (use financial calculator)
                                              interest only     interest
14   TOTAL Monthly           $1440.78         $1239.78          $1317.32
     Payment
                            (11A + 12A)        (11B + 13B)      (11C + 13C)
15   Monthly Savings                          $201.00            $123.46
                                  ---          (14A-14B)         (14A - 14C)
16   Yearly Savings                           $2412.00           $1481.52
                                  ---          (15B x 12)        (15C x 12)
Note: Access period for Connecticut is 9 years & 10 months. Tennessee has a 10-
year repayment period.



11/25/03                                                                Page 6 of 6

				
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